USMarketView

December 28, 2012           Five Losses in a Row

A more somber view replaces yesterday’s optimistic post as the market fell again, even though just six other such closes happened in the last 13 years. Moreover, it’s almost obvious that the following day will see prices turning up, as they did on five of those previous lengthy declines.

What is disturbing though is that it some 200 days elapsed before the S&P500 fully recovered from its last hit of five down days in a row. This happened in February 2004, some 242 days into the price expansion that was to last for another three years.

But as our first figure shows, lengthy price corrections took place four times before the S&P500 finally moved to higher ground without suffering substantial relapses. That can but cause concern.

However, when considering the length of the last expansion, between 2003 and 2007, the outlook still remains bright. Our second diagram reveals that our current expansion is just 958 trading days from its last bottom. That it is some 200 days younger at this point than when the previous bull market turned down.

A closer examination reveals remarkable symmetry; that whereas the path of the current market twice exceeded the 2003/2007 growth, it has also returned as often. Today’s close returns the S&P500 price exactly to where it was in the previous growth cycle.

DJIA                -1.12 percent

NASDAQ       -.72 percent

S&P500       -1.00 percent

The sad headline hides some good news.  Today’s losses are so small that only ten other days in this century fell a smaller amount. Further, while this is the 20^th repeat of four straight days in the red since the beginning of 2000, prices moved higher on most of the following days. Also, and this is for the longer run outlook, four losses in a row happen with equal frequency –about a half a percent of all days- whether prices are rising or falling.

Finally, as the diagram clearly shows, the NASDAQ gains on the next day outnumber declines 9:1, the S&P500 runs 8:2, while even the trailing DJIA has 7 advances to 3 losses when prices are trending up.

It was just months ago, at the beginning of this past August, that prices had a four day losing streak. But the market recovered on the following day, adding near two percent.

DJIA                -.14 percent

NASDAQ        -.14 percent

S&P500          -.12 percent

The DJIA, NASDAQ, and S&P500 lost ground for the third session in a row. It is the fourth time this year for this pattern, and the 60^th repeat since the start of 2000.

Our diagram shows more of these three straight losses happening when prices are moving higher. It reveals also that gains on the following day are more frequent during these up turns. However, earlier this year, the NASDAQ and the DJIA experienced just one increase while suffering two losses on the following day. The S&P500 though, advanced twice.

Another confirmation that the trend of prices remains up, is the small size of these last changes. During the 2007/2009, prices dropped more than minus two percent when the market lost ground three days in a row.  In contrast, these declines since the 2009 low average just about a half a percent; the story is similar for the three losses in a row experienced during the 2003/2007 bull market.

DJIA                -.19 percent

NASDAQ        -.74 percent

S&P500          -.48 percent

Prices fell moderately and losses were much smaller than the near one point decline of the day before. Indeed, of 171 two-in-a-row losses in this century, only five closes declined less than today. By contrast, nine closes of this pattern dropped more than three percent, with five clustered between October and November 2008.

But we find a more optimistic outlook by considering only those days on which price declines are in today’s range, that is negative but larger than the DJIA’s -.39 percent, the NASDAQ’s -.28 percent and the S&P500’s -.24 percent.

All five of these closes shared the good tidings of the 2003/2007 expansion. The diagram shows these points, as well as today’s, for the S&P500.

Considering all of the earlier 171 days with today’s pattern, slightly less than a half, or 71 of the following days saw advances for the DJIA, the NASDAQ and the S&P500.

DJIA                                   -.39 percent

NASDAQ                           -.28 percent

S&P500                             -.24 percent

Prices declined as the market reversed direction again – for the fourth session in a row- a situation experienced just 13 times in this century. Most of those days occurred between 2003 and 2009, with five during the 2003/2007 bull market and another five while prices were falling between 2007 and 2009.

Adding to this lack of harmony is the distinct difference between these averages on the following day: the NASDAQ moved higher nine times, declining on four days, whereas the DJIA and the S&P500 had an even number of ups and downs.

All this comes six trading days after the S&P500’s six gains in a row.  Our diagram locates these 22 closes in the last 13 years. Note that all but two accompany rising prices, that six share the 2003/2007 price acceleration and that the last six are part of the current, since 2009 expansion.

As for the following day, prices moved higher as often as they declined.

DJIA                                   -.91 percent

NASDAQ                           -.96 percent

S&P500                             -.94 percent

Prices changed direction again, reversing now for the third time in the past four trading days. While these oscillations are not rare, today’s is the 40^th repeat in the last 3,269 sessions – in this century. We find little evidence of a systematic relationship between this pattern and the broad up and down swings of the last 13 years.

These accounted for 3.1 percent of the bull market days between 2003 and 2007, and for 3.0 percent of the closes during the following 2007/2009 decline. They represent less than a half-a-percent in the previous bear phase as well as in the current, since March 2009 upswing.

Moreover, the outlook for tomorrow is mixed. In the past, through good and bad times, prices moved higher only slightly more often than they declined. The DJIA shows the highest up ratio, with gains running 63 percent of the following days closes, with this number dropping to 58 percent for the NASDAQ and 55 percent for the S&P500.

DJIA                                   .45 percent

NASDAQ                           .20 percent

S&P500                             .55 percent

Prices reversed direction, falling after yesterday’s advance: it was the fifth down-after-an-up day this year. It follows the last two in early November, which in turn, came after two in late October.  All told today’s is the 20^th such hiccup in 2012.

Could these pairs of contradictory price changes reflect conflicting market sentiment? A tug of war between bulls and bears that could result in a cap on prices?

In 2007, for example, when prices collapsed in October, there were 42 such pairs of down-after-an-up day. That count, though, is more than double 2012’s. However, the previous market top in 2000, with only 22 yields an opposite view, letting in the possibility of a substantial decline.

As for tomorrow, the record shows only 170 closes when the DJIA, the NASDAQ, and the S&P500 declined two days in a row. These are outnumbered by the 215 days on which all three of these averages moved higher. The other 100 some days did not have uniform price changes, but closed with each index moving in opposite direction.

DJIA                                   -.74 percent

NASDAQ                           -.33 percent

S&P500                             -.76 percent

The three averages moved higher for the second day in a row, creating an optimistic outlook. Not only were their advances solid, but in addition, the resulting pattern is characteristic of bull markets. Today’s close is this configuration’s 217^th   repeat since January 2000. Most of these, some 68 percent, happened during the expansions of 2003/2007 and since the March 2009 trough.

Though we characterized today’s advances as strong –and only 23 percent  of all positive closes in this century are larger- they are merely half the size of the average gain for this pattern during the two previous declines. The mean increase during market fall-offs for this pattern is 1.42 percent for the DJIA, 2.32 percent for the NASDAQ and 1.62 percent for the S&P500. They average just .88 percent, .80 percent and 1.16 percent when the bulls are in charge.

Identical good news holds for the following day, with near 60 percent closes moving higher during the two expansions, while these average only 36 percent during bear markets.

DJIA                                   .87 percent

NASDAQ                          1.46 percent

S&P500                            1.15 percent

Today, 950 trading days since the March 2009 bottom, the S&P500 closed at 211 percent of that low. That’s a bit better than the DJIA’s 202 percent recovery yet lags the NASDAQ pace of 237 percent. Yet these strengths could spell bad news for the future: how much further can this recovery go?

Quite a bit, say the statistics, if considered from a more dynamic viewpoint, as revealed by today’s diagram. It compares the current S&P500 price line with that of the 2003/2007 trough to peak history. Just in terms of elapsed days, with the life of that previous bull market lasting 1,154 trading days, this expansion has more than 200 calendar days

Further, with the daily paths of the previous and current expansions near parallel so far, there remains ample appreciation ahead.

Dampening these positive views, however, is the strong pace of this expansion compared to the 2007 result. Today, the S&P500,  950 days from its 2009 low, closed at 1,430; in 2006, at the same 950 days after the previous 2003 low, the S&P500 reached 1,413.  Thus it’s a little ahead, at 101 percent of that recovery rate.

But the DJIA and the NASDAQ have far stronger regains, running at 108 percent and 124 percent of where they stood, 950 days into the 2003/2007 expansion. Thus, it’s not unreasonable to hesitate to signing on to a bright future of further advances.

DJIA                                   .76 percent

NASDAQ                          1.32 percent

S&P500                            1.19 percent

With the S&P500 down for the second day while the DJIA and the NASDAQ down for the third successive session, we face another rare combination. Although its last repeat happened just a month ago, there are just two earlier repeats in the last 13 years. While this infrequency obviously hampers projections of future changes, we implement alternate market characteristics to provide useful insights.

Consider price behavior when the S&P500 declines two days in a row, as it did today. In this century, so far,

Prices change only moderately on the following day, and

Large daily price changes –up and down- dominate declines.

We see these trends in the diagram, though the recent, 2012 successive  up-and-down history is not as distinct in the earlier years of this century.

DJIA                                   -.27 percent

NASDAQ                           -.70 percent

S&P500                             -.41 percent